Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
2025 in Summary
Outlook
Results of Operations
Reconciliations of Non-GAAP Financial Measures
Liquidity and Capital Resources
Pension Benefits
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about business outlook. These forward-looking statements are based on management’s expectations and assumptions as of the date of this Annual Report on Form 10-K and are not guarantees of future performance. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, those described in " Forward-Looking Statements" and Item 1A, Risk Factors , of this Annual Report on Form 10-K.
This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K. Financial information is presented on a continuing operations basis. Unless otherwise stated, amounts discussed are in millions of U.S. Dollars, except for per share data, which is calculated and presented on a diluted basis in U.S. Dollars per weighted average common share.
The financial measures discussed below are presented in accordance with U.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on an "adjusted", or "non-GAAP", basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance. For each non-GAAP financial measure, including adjusted operating income, adjusted operating margin, adjusted earnings per share ("EPS"), adjusted EBITDA, adjusted effective tax rate, and capital expenditures, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of non-GAAP financial measures are presented under the “ Reconciliations of Non-GAAP Financial Measures ” section beginning on page 42 .
Comparisons included in the discussion that follows are for fiscal year 2025 versus ("vs.") fiscal year 2024. A discussion of changes from fiscal year 2023 to fiscal year 2024 and other financial information related to fiscal year 2023 is available in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of our Annual Report on Form 10-K for the fiscal year ended 30 September 2024, which was filed with the SEC on 21 November 2024.
For information concerning activity with our related parties, refer to Note 25, Supplemental Information , to the consolidated financial statements.
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BUSINESS OVERVIEW
Air Products and Chemicals, Inc., a Delaware corporation founded in 1940, is a world-leading industrial gases company that has built a reputation for its innovation, operational excellence, and commitment to safety and environmental stewardship. Focused on serving energy, environmental, and emerging markets and generating a cleaner future, we offer products and services that improve our customers’ operations and sustainability.
We serve a broad range of industries, including refining, chemicals, metals, electronics, manufacturing, medical, and food, providing essential industrial gases, related equipment, and applications expertise. We also develop, engineer, build, own, and operate some of the world’s largest clean hydrogen projects supporting the transition to low- and zero-carbon energy, particularly in industrial applications and the heavy-duty transportation sector. Additionally, our sale of equipment businesses provide specialized products such as turbomachinery, membrane systems, and cryogenic containers to customers worldwide. For additional information on our product and service offerings, including production, distribution, and end use, refer to Item 1, Business , of this Annual Report on Form 10-K.
We conduct business in approximately 50 countries and regions throughout the world. Our industrial gases business is organized and operated regionally in the Americas, Asia, Europe, and Middle East and India segments and generates the majority of our sales via our on-site and merchant supply modes. Approximately half our total revenue is generated through the on-site supply mode, which is governed by contracts that are generally long-term in nature with provisions that allow us to pass through changes in energy costs to our customers.
Our Corporate and other segment includes the results of our sale of equipment businesses, costs for corporate support functions and global management activities, and other income and expenses not directly associated with the regional segments, such as foreign exchange gains and losses. In fiscal year 2024, this segment also included the results of our former liquefied natural gas ("LNG") process technology and equipment business, which we sold to Honeywell International Inc. on 30 September 2024.
For additional information regarding our supply modes and business segments, refer to Note 7, Revenue Recognition , and Note 26, Business Segment and Geographic Information , to the consolidated financial statements.
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2025 IN SUMMARY
Fiscal year 2025 was a transitional year for Air Products, marked by a renewed focus on our core industrial gas business under the leadership of our new Chief Executive Officer, who joined the Company in February 2025. We took decisive actions to reshape our portfolio, including the cancellation and descoping of several large energy transition projects, and enhance operations through targeted productivity initiatives. We also sharpened our approach to capital deployment, emphasizing strict return thresholds, appropriate risk-sharing, and alignment with long-term customer relationships. These efforts are helping to improve execution and support reductions in capital expenditures and debt over time.
Key results versus the prior year include:
• Sales of $12.0 billion decreased 1%, or $63.3, as 4% lower volumes were partially offset by 2% higher energy cost pass-through to customers and 1% higher pricing driven by non-helium merchant products across all regions. Lower volumes primarily reflect the September 2024 LNG sale, lower global helium demand, and previously announced project exits, partially offset by higher on-sites and favorable non-helium merchant.
• Operating loss was $877.0 compared to operating income of $4.5 billion in fiscal year 2024. The operating loss in fiscal year 2025 included approximately $3.7 billion in pre-tax charges related to business and asset actions ($3.0 billion after tax, or $13.68 per share). Operating income in fiscal year 2024 included a $1.6 billion pre-tax gain on the September 2024 sale of the LNG business ($1.2 billion after tax, or $5.38 per share).
• Adjusted operating income of $2.9 billion decreased 3%, or $89.8, due to lower volumes and higher costs, partially offset by higher non-helium pricing. The higher costs were driven by fixed-cost inflation and depreciation, partially offset by productivity improvements across all segments.
• Equity affiliates' income of $647.7 was flat. Increased contributions from affiliates in the Europe and Asia segments were offset by lower income from affiliates in the Corporate and other, Middle East and India, and Americas segments.
• Net loss was $354.4 compared to net income of $3.9 billion in fiscal year 2024. The decrease was primarily due to higher charges for business and asset actions in fiscal year 2025 and the prior year gain from the sale of the LNG business.
• Adjusted EBITDA of $5.1 billion increased 1%, or $30.1.
• Loss per share of $1.74 was driven by an after-tax charge attributable to Air Products of $3.0 billion for business and asset actions recorded during fiscal year 2025. On a non-GAAP basis, adjusted earnings per share ("EPS") was $12.03. In the prior year, EPS was $17.24 and adjusted EPS was $12.43. A summary table of changes in EPS is presented on page 31 .
• We believe providing a consistent dividend plays a critical part in the creation of shareholder value. During fiscal year 2025, we marked our 43 rd consecutive year of increasing our dividends and returned approximately $1.6 billion to our shareholders through dividend payments.
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Changes in Diluted EPS Attributable to Air Products
The per share impacts for the items presented in the table below were calculated independently and may not sum to the total change in diluted EPS due to rounding.
Fiscal Year Ended 30 September
Change vs.
Prior Year
Earnings (Loss) per share
Less: Loss per share from discontinued operations
Earnings (Loss) per share from continuing operations
% Change from prior year
Operating Items
Underlying business:
Volume
Price, net of variable costs
Other costs
Currency
Business and asset actions (A)
Shareholder activism-related costs
Gain on sale of business
Gain on sale of other assets (B)
Total Operating Items
Other Impacts
Equity affiliates' income
Equity method investment impairment associated with business and asset actions (A)
Interest expense
Other non-operating income/expense, net:
Gain on de-designation of cash flow hedges (C)
Non-service pension cost, net
Other
Change in effective tax rate, excluding discrete items below
Tax reform adjustment related to deemed foreign dividends
Tax on repatriation of foreign earnings
Noncontrolling interests (A)(C)
Weighted average diluted shares
Total Other Items
Total Change
% Change from prior year
**Change versus prior period is not meaningful due to materially higher charges for business and asset actions in fiscal year 2025. The per share impact of these charges is primarily reflected in the "Operating Items" section in the table above.
(A) The per share impacts associated with charges for business and asset actions were calculated based on a total after-tax charge attributable to Air Products of approximately $3.0 billion ($13.68 per share). The amount of the charges attributable to our noncontrolling partners was $10.7.
(B) Gain on the sale of a regional office in Hersham, England, is reflected on the consolidated income statements within "Other income (expense), net."
(C) The per share impact reflected within "Gain on de-designation of cash flow hedges" was calculated based on an after-tax gain attributable to Air Products of $7.2 ($0.03 per share) compared to a loss of $4.3 ($0.02 per share) in the prior year. Amounts attributable to our noncontrolling partners were a gain of $17.6 and a loss of $10.6, respectively.
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The table below summarizes the diluted per share impact of our non-GAAP adjustments in fiscal years 2025 and 2024. These impacts were calculated independently and may not sum to totals due to rounding.
Fiscal Year Ended 30 September
Change vs.
Prior Year
Earnings (Loss) per Share
Business and asset actions
Shareholder activism-related costs
Gain on sale of business
Gain on sale of other assets
(Gain) Loss on de-designation of cash flow hedges
Non-service pension cost, net
Tax reform adjustment related to deemed foreign dividends
Tax on repatriation of foreign earnings
Adjusted Earnings per Share
% Change from prior year
OUTLOOK
Statements regarding business outlook should be read in conjunction with the Forward-Looking Statements of this Annual Report on Form 10-K.
As we look ahead, we believe Air Products is well-positioned to deliver sustainable growth through a renewed focus on our core industrial gas business. Decisive actions taken in fiscal year 2025, including the cancellation and descoping of several large energy transition projects and other targeted productivity initiatives, reflect our commitment to disciplined capital allocation and operational excellence. These actions allow us to concentrate resources on opportunities that will deliver the greatest value to our shareholders.
While clean energy markets have not developed as previously anticipated, we remain confident in the long-term demand fundamentals for industrial gases and clean energy solutions. We continue to pursue opportunities in both traditional industrial gas and energy transition projects that meet our projected return requirements. Additionally, we have made significant progress on the construction of several energy transition projects, including the NEOM Green Hydrogen Project, which we expect to come onstream and deliver green ammonia in 2027.
In fiscal year 2026, we expect to achieve earnings growth from new plant onstreams, continued pricing discipline, and productivity improvements. We remain committed to cost control, a reduction in capital expenditures, and other measures aimed at unlocking value and generating cash. Cost discipline remains a top priority as we seek to mitigate the impact of ongoing inflationary pressures and continued helium headwinds, while continuing to reward shareholders through increased dividends, as we have done for the past 43 consecutive years.
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RESULTS OF OPERATIONS
DISCUSSION OF CONSOLIDATED RESULTS
Change vs. Prior Year
Fiscal Year Ended 30 September
GAAP Measures
Sales
Operating income (loss)
Operating margin
Equity affiliates’ income
Net income (loss)
Non-GAAP Measures
Adjusted operating income
Adjusted operating margin
Adjusted EBITDA
** Change versus prior period is not meaningful due to charges for business and asset actions recorded in fiscal year 2025.
Sales
The table below summarizes the major factors that impacted consolidated sales for the periods presented:
Volume
Price
Energy cost pass-through to customers
Currency
Total Consolidated Sales Change
Sales of $12.0 billion decreased 1%, or $63.3, as lower volumes of 4% were partially offset by higher energy cost pass-through to customers of 2% and favorable pricing of 1%. Lower volumes primarily reflect the September 2024 LNG sale, lower global helium demand, and the previously announced project exits, partially offset by higher on-sites and favorable non-helium merchant. The overall pricing improvement reflects a 2% increase in our merchant business, which was driven by non-helium product lines in our Europe and Americas segments. Currency was flat versus the prior year.
Cost of Sales and Gross Margin
Cost of sales of $8.3 billion increased 1%, or $87.3, due to higher energy cost pass-through to customers of $278, higher costs of $73, higher power and fuel costs in our merchant business of $49, and an unfavorable currency impact of $12. The higher costs of $73 were driven by fixed-cost inflation and depreciation, partially offset by productivity improvements. These impacts were partially offset by lower costs of $325 attributable to lower sales volumes. Gross margin of 31.4% decreased 110 bp from 32.5% in the prior year primarily due to higher costs and increased energy cost pass-through to customers.
Selling and Administrative Expense
Selling and administrative expense of $906.1 decreased 4%, or $36.3, as our productivity actions were partially offset by labor inflation. Selling and administrative expense as a percentage of sales decreased to 7.5% from 7.8% in the prior year.
Research and Development Expense
Research and development expense of $96.3 decreased 4%, or $3.9. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.
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Business and Asset Actions
The charges we record for business and asset actions are not recorded in segment results. Additional information regarding these actions can be found in Note 5, Business and Asset Actions , to the consolidated financial statements.
In fiscal year 2025, total pre-tax charges related to business and asset actions were approximately $3.7 billion ($3.0 billion attributable to Air Products after tax, or $13.68 per share) compared to $57.0 ($43.8 after tax, or $0.20 per share) in fiscal year 2024.
During the second quarter of fiscal year 2025, our Board of Directors and Chief Executive Officer initiated a project review to focus resources on projects we believe will deliver the greatest value to our shareholders. As a result of this review, we made the decision to exit various projects, primarily related to clean energy generation and distribution. The review remains ongoing and may result in additional costs in future periods. In connection with this review, we recognized project exit costs totaling approximately $3.6 billion, primarily consisting of noncash asset write-downs and estimated costs to terminate contractual commitments. Costs attributable to our noncontrolling partners totaled $10.7.
The remaining charge of $123.7 in fiscal year 2025 related to severance and other employee benefits under a global cost reduction program initiated in June 2023. Fiscal year 2024 costs under the plan totaled $57.0. Once all actions under the plan are fully executed, we expect to realize annual pre-tax savings of approximately $240 to $260, primarily through selling and administrative expense.
Our estimates related to the actions discussed above reflect our best judgment based on information available as of 30 September 2025. Final settlement of these items may differ materially from our current estimates, which could impact our consolidated financial statements in future periods.
Shareholder Activism-Related Costs
Shareholder activism-related costs totaling $86.3 ($71.7 after tax, or $0.32 per share) were reflected in our consolidated income statements during the first three quarters of fiscal year 2025. These costs were recorded in connection with a proxy contest that concluded in January 2025 following certification of the election of directors at the 2025 Annual Meeting of Shareholders. These costs were not allocated to our reportable segments. No shareholder activism-related charges were recorded during the fourth quarter.
Of the total $86.3 reflected on our fiscal year 2025 income statement, $31.9 related to legal and professional service fees and proxy solicitation expenses incurred directly by Air Products, primarily during the first quarter. In the second quarter, $29.7 was recorded for executive separation costs following the Board of Directors’ appointment of a new Chief Executive Officer in February 2025, which included a noncash expense of $22.4 to accelerate vesting of share-based awards and $7.3 in severance and other cash benefits. The remaining $24.7 was authorized and paid during the third quarter as a reimbursement to Mantle Ridge LP and its affiliated entities (collectively, “Mantle Ridge”) for expenses incurred in connection with the proxy contest. The reimbursement was unanimously approved by our Board of Directors, with one director abstaining from the vote due to his role as founder and Chief Executive Officer of Mantle Ridge.
Refer to Note 25, Supplemental Information , for additional information.
Gain on Sale of Business
In April 2025, we completed the sale of our 100% ownership interest in a consolidated subsidiary in Singapore for cash proceeds of $104.3. We recognized a gain of $67.3 ($51.9 after tax, or $0.23 per share) in connection with the transaction during the third quarter of fiscal year 2025. Prior to the divestiture, the subsidiary contributed annual sales of approximately $50 to our Asia segment.
On 30 September 2024, we completed the sale of our LNG business to Honeywell International Inc. As a result of the transaction, we recorded a gain of $1.6 billion ($1.2 billion after tax, or $5.38 per share) during the fourth quarter of fiscal year 2024. Prior to the divestiture, the results of the LNG business were reflected within the Corporate and other segment.
The gains from the sale of the businesses discussed above were not recorded in segment results. Refer to Note 4, Gain on Sale of Business , to the consolidated financial statements for additional information.
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Other Income (Expense), Net
Other income of $110.1 increased 89%, or $51.9. The increase was primarily driven by a $31.3 gain ($23.8 after tax, or $0.11 per share) on the sale of a regional office in Hersham, England, during the third quarter of fiscal year 2025. This gain is not reflected in the results of the Europe segment.
Operating Income (Loss) and Operating Margin
Operating loss was $877.0 in fiscal year 2025 compared to income of $4.5 billion in the prior year. The loss in fiscal year 2025 was primarily attributable to higher pre-tax charges for business and asset actions, which totaled $3.7 billion in fiscal year 2025 compared to $57 in fiscal year 2024. Additionally, the prior year included a $1.6 billion pre-tax gain on the sale of the LNG business. Unfavorable volumes lowered operating income by $122, primarily due to the divestiture of the LNG business in September 2024. Operating income contributed by the LNG business in the prior year was approximately $135. Fiscal year 2025 also included shareholder activism-related costs of $86. In addition, other costs were unfavorable by $31, primarily reflecting fixed-cost inflation and higher depreciation, partially offset by productivity improvements. We also recorded pre-tax gains totaling approximately $99 in connection with the sale of a consolidated subsidiary and the sale of a regional office during the third quarter of fiscal year 2025. Furthermore, higher pricing primarily from non-helium merchant products favorably impacted operating results by $55, net of power and fuel costs.
Due to these factors, operating margin was negative 7.3% compared to 36.9% in the prior year.
Adjusted Operating Income and Adjusted Operating Margin
Adjusted operating income of $2.9 billion decreased 3%, or $89.8, due to lower volumes and higher costs, partially offset by higher non-helium pricing. The higher costs were driven by fixed-cost inflation and depreciation, partially offset by productivity improvements. Adjusted operating margin of 23.7% decreased 70bp from 24.4% in the prior year. Approximately 50bp of the decline was attributable to increased energy cost pass-through to customers.
Equity Affiliates’ Income
Equity affiliates' income of $647.7 was flat compared to the prior year. Increased contributions from affiliates in the Europe and Asia segments were offset by lower income from affiliates in the Corporate and other, Middle East and India, and Americas segments.
Interest Expense
Fiscal Year Ended 30 September
Interest incurred
Less: Capitalized interest
Interest expense
Interest expense decreased 2%, or $4.8, driven by a higher carrying value of ongoing projects under construction despite our decision to exit various projects in fiscal year 2025. This decrease was partially offset by higher interest incurred on principal borrowings from Euro- and U.S. Dollar-denominated senior fixed-rate notes issued in February and June 2025.
Other Non-Operating Income (Expense), Net
Other non-operating income of $2.6 increased $76.4 from an expense of $73.8 in the prior year. The increase was primarily driven by lower non-service pension costs, which totaled $45.0 ($33.7 after tax, or $0.15 per share) in fiscal year 2025, compared to $102.0 ($76.8 after tax, or $0.34 per share) in the prior year. Additionally, de-designated interest rate swaps related to financing for the NEOM Green Hydrogen Project resulted in an unrealized gain of $27.0 ($7.2 attributable to Air Products after tax, or $0.03 per share), compared to an unrealized loss of $16.3 ($4.3 after tax, or $0.02 per share) in the prior year. Refer to Note 3, Variable Interest Entities , and Note 15, Financial Instruments , to the consolidated financial statements for additional information. These benefits were partially offset by lower interest income on short-term investments.
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Discontinued Operations
We recorded net losses from discontinued operations of $8.0 and $13.9 in fiscal years 2025 and 2024, respectively.
In fiscal year 2025, a pre-tax loss from discontinued operations of $10.6 ($8.0 after tax, or $0.04 per share) was recorded in the third quarter primarily to increase our existing liability for retained environmental remediation obligations related to production facilities in the atmospheric emulsions and global pressure-sensitive adhesives businesses, which were sold in 2008. Refer to the "Piedmont" discussion under Note 19, Commitments and Contingencies , for additional information.
In fiscal year 2024, a pre-tax loss from discontinued operations of $19.4 ($13.9 after tax, or $0.06 per share) was recorded in the fourth quarter to increase our existing liability for retained environmental remediation obligations related to the 2006 sale of the Amines business. Refer to the "Pace" discussion under Note 19, Commitments and Contingencies , for additional information.
Net Income (Loss)
Net loss was $354.4 for fiscal year 2025 compared to net income of $3.9 billion in the prior year. The loss in fiscal year 2025 was primarily attributable to after-tax charges for business and asset actions, which totaled $3.0 billion in fiscal year 2025 compared to $44 in the prior year. Additionally, fiscal year 2024 included a $1.2 billion after-tax gain recognized from the sale of the LNG business in September 2024.
Adjusted EBITDA
Adjusted EBITDA of $5.1 billion increased 1%, or $30.1, as higher pricing and productivity improvements were partially offset by lower volumes and fixed-cost inflation.
Effective Tax Rate
The effective tax rate equals the income tax expense (benefit) divided by income or loss before taxes. Equity affiliates' income is primarily included net of income taxes within income before taxes on our consolidated income statements.
For the fiscal year ended 30 September 2025, our consolidated income statements include an income tax benefit of $94.3 compared to an income tax expense of $944.9 for the comparative prior-year period. The tax benefit in fiscal year 2025 represents an effective tax rate of 21.4% on the pre-tax loss reported for the fiscal year ended 30 September 2025 compared to an effective rate of 19.6% for tax expense on the pre-tax income reported for the fiscal year ended 30 September 2024.
The current year rate was primarily impacted by charges for business and asset actions and other items as further discussed below. Our estimates related to these items reflect our best judgment based on information available as of 30 September 2025. The amount and timing of final settlement of these items may differ from our current estimates, which could impact our tax provision in future periods.
Our prior year effective tax rate included impacts from the $1.6 billion gain on the sale of the LNG business during the fourth quarter of fiscal year 2024. This gain increased our income from continuing operations before taxes, which diluted the impact of recurring effective tax rate reconciling items for fiscal year 2024.
For additional information, refer to Note 24, Income Taxes , to the consolidated financial statements.
Business and Asset Actions
In fiscal year 2025, we recorded charges for project exits and other cost reduction measures as described in Note 5, Business and Asset Actions , to the consolidated financial statements. These actions resulted in a pre-tax charge of approximately $3.7 billion. The related net tax benefit of these actions totaled $695.2, which includes an $11.3 cost for reserves established for uncertain tax positions related to the deductibility of the amount of the charges incurred in foreign subsidiaries. We also recorded a net tax cost of $197.4 resulting from a $364.9 increase in our valuation allowance net of $167.5 of deferred tax assets related to the future disposal of certain foreign subsidiaries.
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Tax Reform Adjustment Related to Deemed Foreign Dividends
During the second quarter of fiscal year 2025, we recorded a net income tax benefit of $34.9 related to our intent to file a refund claim after a review of several U.S. Tax Court cases regarding the U.S. taxation of deemed foreign dividends in the transition year of the U.S. Tax Cuts and Jobs Act (our fiscal year 2018).
Tax on Repatriation of Foreign Earnings
During the second quarter of fiscal year 2025, we recorded an income tax expense of $31.4 related to estimated withholding taxes on foreign earnings that we no longer intend to indefinitely reinvest. There were no other significant changes to our assumptions regarding the reinvestment of foreign earnings during fiscal year 2025.
Shareholder Activism-Related Costs
During fiscal year 2025, we recorded costs of $86.3 related to a proxy contest as further discussed in Note 25, Supplemental Information , to the consolidated financial statements. We recognized an income tax benefit of $14.6 primarily related to costs for legal and other professional service fees as well as incremental proxy solicitation costs related to the 2025 Annual Meeting of Shareholders.
Other
In addition to the items discussed above, our effective tax rate was higher in fiscal year 2025 due to lower tax benefits on U.S. export income in fiscal year 2025, higher net costs on foreign-related income taxed in the U.S, and an income tax benefit for a tax election related to a non-U.S. subsidiary that occurred in our prior fiscal year but did not recur in fiscal year 2025. These increases were partially offset by larger benefits in fiscal year 2025 for the release of unrecognized tax benefits upon expiration of the applicable statute of limitations.
Adjusted Effective Tax Rate
Our adjusted effective tax rate, which excludes the impact of the business and asset actions described above as well as other adjustments in the "Reconciliations of Non-GAAP Financial Measures" section beginning on page 42 , was 18.2% and 17.8% for the fiscal years ended 30 September 2025 and 2024, respectively.
On 4 July 2025, H.R.1, commonly referred to as the One Big Beautiful Bill Act ("OBBBA"), was enacted in the United States. OBBBA includes a broad range of tax reform provisions, including extending and modifying certain key U.S. Tax Cuts and Jobs Act provisions (both domestic and international), expanding certain Inflation Reduction Act incentives, and accelerating the phase-out of others. OBBBA did not have a material impact on our fiscal year 2025 results and is expected to primarily affect future fiscal years.
While OBBBA revised certain Inflation Reduction Act incentives, we continue to anticipate future benefits from tax credits related to certain clean hydrogen production projects, where construction has begun or is expected to begin prior to the applicable phase-out dates.
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DISCUSSION OF RESULTS BY BUSINESS SEGMENT
Americas
Change vs. Prior Year
Fiscal Year Ended 30 September
GAAP Measures
Sales
Operating income
Operating margin
Equity affiliates’ income
Non-GAAP Measure
Adjusted EBITDA
The table below summarizes the major factors that impacted sales in the Americas segment for the periods presented:
Volume
Price
Energy cost pass-through to customers
Currency
Total Americas Sales Change
Sales of $5.1 billion increased 2%, or $85.8, as higher energy cost pass-through to customers of 4% and higher pricing of 2% were partially offset by lower volumes of 3% and an unfavorable currency impact of 1%. Higher energy cost pass-through to customers was primarily attributable to higher natural gas prices. The overall pricing improvement reflects a 3% increase in our merchant business, which was driven by non-helium product lines. Volumes were unfavorable primarily due to lower on-sites, driven by previously announced project exits and the impact of a one-time asset sale in the prior year related to a customer-initiated early contract termination. Lower helium demand also contributed to the volume decline, despite a significant, non-recurring helium sale to an existing merchant customer in the first quarter. These headwinds were partially offset by a favorable one-time customer contract amendment in the second quarter of fiscal year 2025.
Operating income of $1.5 billion decreased 3%, or $45.5, due to higher costs of $92 and unfavorable currency of $10, partially offset by positive pricing, net of power and fuel costs, of $41 and favorable business mix of $15. The increase in costs was mainly driven by higher depreciation, maintenance, and fixed-cost inflation, partially offset by productivity improvements. Additionally, income recognized from the sale of an equity method investment in the first quarter of fiscal year 2025 was largely offset by a favorable legal settlement recorded in the prior year. Operating margin of 29.6% decreased 150 bp from 31.1% in the prior year as the margin impacts of higher costs and higher energy cost pass-through to customers were partially offset by favorable business mix. Approximately 100 bp of the decline was attributable to higher energy cost pass-through.
Equity affiliates’ income of $157.0 decreased 1%, or $1.8, driven by our share of income from an asset sale in the prior year, partially offset by higher income from an affiliate in Mexico.
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Asia
Change vs. Prior Year
Fiscal Year Ended 30 September
GAAP Measures
Sales
Operating income
Operating margin
Equity affiliates’ income
Non-GAAP Measure
Adjusted EBITDA
The table below summarizes the major factors that impacted sales in the Asia segment for the periods presented:
Volume
Price
Energy cost pass-through to customers
Currency
Total Asia Sales Change
Sales of $3.3 billion increased 1%, or $46.7, as higher energy cost pass-through to customers of 2% was partially offset by lower pricing of 1%. The overall pricing decrease reflects a 2% decline in our merchant business, primarily driven by lower helium pricing. Volumes were flat, with growth in on-sites offset by lower demand for helium.
Operating income of $851.1 decreased 1%, or $8.1, primarily due to lower pricing, net of power and fuel costs, of $30 and unfavorable business mix of $23, partially offset by lower costs of $48. The cost improvement was primarily attributable to productivity and lower maintenance costs, which was partially offset by higher costs related to incentive compensation and fixed-cost inflation. Due to these factors, operating margin of 26.0% decreased 60 bp from 26.6% in the prior year.
Equity affiliates’ income of $42.3 increased 29%, or $9.4, driven by prior year maintenance expense at an affiliate in China as well as higher income from affiliates in Thailand in fiscal year 2025.
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Europe
Change vs. Prior Year
Fiscal Year Ended 30 September
GAAP Measures
Sales
Operating income
Operating margin
Equity affiliates’ income
Non-GAAP Measure
Adjusted EBITDA
The table below summarizes the major factors that impacted sales in the Europe segment for the periods presented:
Volume
Price
Energy cost pass-through to customers
Currency
Total Europe Sales Change
Sales of $3.0 billion increased 6%, or $161.1, due to higher pricing of 2%, a favorable currency impact of 2%, higher volumes of 1%, and higher energy cost pass-through to customers of 1%. The overall pricing improvement reflects a 3% increase in our merchant business, which was driven by non-helium product lines. The 1% volume growth was supported by higher on-site activity, partially offset by lower helium demand.
Operating income of $844.7 increased 4%, or $34.7, due to favorable pricing, net of power and fuel costs, of $42 and favorable currency of $14, partially offset by an unfavorable business mix of $13 and higher costs of $8. Higher costs for depreciation and fixed-cost inflation were partially offset by productivity improvements. Due to these factors, operating margin of 28.3% decreased 40 bp from 28.7% in the prior year.
Equity affiliates’ income of $101.9 increased 16%, or $13.8, driven by higher income from affiliates in Italy and South Africa.
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Middle East and India
Change vs. Prior Year
Fiscal Year Ended 30 September
GAAP Measures
Sales
Operating income
Equity affiliates’ income
Non-GAAP Measure
Adjusted EBITDA
Sales of $135.9 increased 1%, or $1.5, primarily due to higher volumes. Operating income of $9.6 increased 63%, or $3.7, primarily due to lower costs following the deconsolidation of Blue Hydrogen Industrial Gases Company ("BHIG") in the second quarter of fiscal year 2025, as well as productivity improvements.
Equity affiliates' income of $340.9 decreased 2%, or $6.6, driven by JIGPC.
Corporate and other
Change vs. Prior Year
Fiscal Year Ended 30 September
GAAP Measures
Sales
Operating loss
Equity affiliates' income
Non-GAAP Measure
Adjusted EBITDA
Sales of $520.0 decreased 41%, or $358.4, and operating loss of $367.3 increased 25%, or $74.6, primarily due to the divestiture of the LNG business in September 2024. Operating income generated by the LNG business in the prior year was approximately $135. This headwind was partially offset by lower changes to sale of equipment project estimates and productivity improvements, net of fixed-cost inflation.
Equity affiliates' income of $12.4 decreased 39%, or $8.0, driven by lower contributions from an affiliate in Algeria.
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RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
(Millions of U.S. Dollars unless otherwise indicated, except for per share data)
We present certain financial measures, other than in accordance with U.S. generally accepted accounting principles ("GAAP"), on an "adjusted" or "non-GAAP" basis. On a consolidated basis, these measures include adjusted operating income, adjusted operating margin, adjusted earnings per share ("EPS"), adjusted EBITDA, the adjusted effective tax rate, and capital expenditures. On a segment basis, we present adjusted EBITDA. In addition to these measures, we also present certain supplemental non-GAAP financial measures to help the reader understand the impact that certain disclosed items, or "non-GAAP adjustments," have on the calculation of our adjusted EPS. For each non-GAAP financial measure, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP.
We provide these non-GAAP financial measures to allow investors, potential investors, securities analysts, and others to evaluate the performance of our business in the same manner as our management. We believe these measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. However, we caution readers not to consider these measures in isolation or as a substitute for the most directly comparable measures calculated in accordance with GAAP. Readers should also consider the limitations associated with these non-GAAP financial measures, including the potential lack of comparability of these measures from one company to another.
In many cases, non-GAAP financial measures are determined by adjusting the most directly comparable GAAP measure to exclude non-GAAP adjustments that we believe are not representative of our underlying business performance. For example, we exclude the impact of the non-service components of net periodic benefit/cost for our defined benefit pension plans. Non-service related components are recurring, non-operating items that include interest cost, expected returns on plan assets, prior service cost amortization, actuarial loss amortization, as well as special termination benefits, curtailments, and settlements. The net impact of non-service related components is reflected within “Other non-operating income (expense), net” on our consolidated income statements. Adjusting for the impact of non-service pension components provides management and users of our financial statements with a more accurate representation of our underlying business performance because these components are driven by factors that are unrelated to our operations, such as volatility in equity and debt markets. Further, non-service related components are not indicative of our defined benefit plans’ future contribution needs due to the funded status of the plans. We may also exclude certain expenses associated with cost reduction actions and charges as well as on transactions, such as the sale of the LNG business. The reader should be aware that we may recognize similar or in the future.
When applicable, the tax impact of our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax impact of our non-GAAP adjustments. These tax impacts are primarily driven by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.
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ADJUSTED OPERATING INCOME AND ADJUSTED EPS
In addition to adjusted EPS, adjusted operating income is an important measure to evaluate our business performance following the appointment of our new Chief Executive Officer in February 2025. The table below presents a reconciliation of adjusted operating income to the most directly comparable GAAP measure, along with reconciliations for each major component used in the calculation of adjusted EPS.
In periods that we have non-GAAP adjustments, we believe it is important for readers to understand the impact of each adjustment as management excludes these items when assessing the Company's underlying performance.
Per share amounts are calculated and presented on a diluted basis from continuing operations attributable to Air Products. These amounts are computed independently and may not sum to totals due to rounding. Because we reported a loss from operations for fiscal year 2025, GAAP loss per share is calculated using the basic weighted average share count of 222.7 million, which does not consider outstanding share-based awards due to their anti-dilutive effect. Both adjusted earnings per share and the individual adjustments used in its calculation are based on a diluted weighted average share count of 222.9 million.
Operating
Income/
Loss
Equity
Affiliates'
Income
Other Non-
Operating
Inc/Exp, Net
Income Tax
Benefit/
Expense
Net Income/Loss Attributable to Air Products
Earnings/
Loss per Share
FY2025 GAAP
FY2024 GAAP
$ GAAP Change
% GAAP Change
FY2025 GAAP Measures
Business and asset actions (A)
Shareholder activism-related costs
Gain on sale of business
Gain on sale of other assets (B)
Gain on de-designation of cash flow hedges (c)
Non-service pension cost, net
Tax reform adjustment related to deemed foreign dividends
Tax on repatriation of foreign earnings
FY2025 Adjusted Measures
FY2024 GAAP Measures
Gain on sale of business
Business and asset actions
Loss on de-designation of cash flow hedges (C)
Non-service pension cost, net
FY2024 Adjusted Measures
$ Adjusted Change
% Adjusted Change
(A) Charge attributable to noncontrolling interests was $10.7.
(B) Reflected on the fiscal year 2025 consolidated income statement in "Other income (expense), net."
(C) Gain attributable to noncontrolling interests was $17.6 in fiscal year 2025. Loss attributable to noncontrolling interests was $10.6 in fiscal year 2024.
** Change versus prior period is not meaningful due to charges for business and asset actions recorded in fiscal year 2025.
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ADJUSTED OPERATING MARGIN
The table below reconciles GAAP operating margin to adjusted operating margin, illustrating the impact of non-GAAP adjustments on our reported margins. Margins are calculated independently for each period by dividing each line item by consolidated sales for the respective period. As a result, individual components may not sum to totals due to rounding.
Operating Income/Loss
Operating Margin
FY2025 GAAP
FY2024 GAAP
$ GAAP Change
%/bp GAAP Change
FY2025 GAAP Measures
Business and asset actions
Shareholder activism-related costs
Gain on sale of business
Gain on sale of other assets
FY2025 Adjusted Measures
FY2024 GAAP Measures
Gain on sale of business
Business and asset actions
FY2024 Adjusted Measures
$ Adjusted Change
%/bp Adjusted Change
** Change versus prior period is not meaningful due to charges for business and asset actions recorded in fiscal year 2025.
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ADJUSTED EBITDA
We define adjusted EBITDA as net income or loss less income or loss from discontinued operations, net of tax, and excluding non-GAAP adjustments, which we do not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax expense (benefit), and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance on both a consolidated and a segment basis.
The tables below present a reconciliation of consolidated net income on a GAAP basis to consolidated adjusted EBITDA:
Net income (loss)
Less: Loss from discontinued operations, net of tax
Add: Interest expense
Less: Other non-operating income (expense), net
Add: Income tax expense (benefit)
Add: Depreciation and amortization
Add: Business and asset actions
Add: Shareholder activism-related costs
Less: Gain on sale of business
Less: Gain on sale of other assets
Add: Equity method investment impairment associated with business and asset actions
Adjusted EBITDA
Change GAAP
Net income $ change
Net income % change
Change Non-GAAP
Adjusted EBITDA $ change
Adjusted EBITDA % change
** Change versus prior period is not meaningful due to charges for business and asset actions recorded in fiscal year 2025.
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The tables below present a reconciliation of operating income (loss) by segment to adjusted EBITDA by segment for the fiscal years ended 30 September 2025 and 2024:
Americas
Change vs. Prior Year
Fiscal Year Ended 30 September
Operating income
Add: Depreciation and amortization
Add: Equity affiliates' income
Adjusted EBITDA
Asia
Change vs. Prior Year
Fiscal Year Ended 30 September
Operating income
Add: Depreciation and amortization
Add: Equity affiliates' income
Adjusted EBITDA
Europe
Change vs. Prior Year
Fiscal Year Ended 30 September
Operating income
Add: Depreciation and amortization
Add: Equity affiliates' income
Adjusted EBITDA
Middle East and India
Change vs. Prior Year
Fiscal Year Ended 30 September
Operating income
Add: Depreciation and amortization
Add: Equity affiliates' income
Adjusted EBITDA
Corporate and other
Change vs. Prior Year
Fiscal Year Ended 30 September
Operating loss
Add: Depreciation and amortization
Add: Equity affiliates' income
Adjusted EBITDA
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ADJUSTED EFFECTIVE TAX RATE
The effective tax rate equals the income tax expense (benefit) divided by income or loss from continuing operations before taxes. We calculate our adjusted effective tax rate by adjusting the numerator and denominator to exclude the tax and before tax impacts of our non-GAAP adjustments, respectively. The table below presents a reconciliation of the GAAP effective tax rate to our adjusted effective tax rate:
Fiscal Year Ended 30 September
Income tax expense (benefit)
Income (loss) from continuing operations before taxes
Effective tax rate
Reconciliation of GAAP to Non-GAAP:
Income tax expense (benefit)
Business and asset actions tax impact
Shareholder activism-related costs tax impact
Gain on sale of business tax impact
Gain on sale of other assets tax impact
(Gain) Loss on de-designation of cash flow hedges tax impact
Non-service pension cost, net tax impact
Tax reform adjustment related to deemed foreign dividends
Tax on repatriation of foreign earnings
Adjusted income tax expense
Income (loss) from continuing operations before taxes
Business and asset actions
Shareholder activism-related costs
Gain on sale of business
Gain on sale of other assets
(Gain) Loss on de-designation of cash flow hedges
Non-service pension cost, net
Business and asset actions-equity method investment
Adjusted income from continuing operations before taxes
Adjusted effective tax rate
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CAPITAL EXPENDITURES
Capital expenditures is a non-GAAP financial measure that we define as the sum of cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), investment in and advances to unconsolidated affiliates, and investment in financing receivables on our consolidated statements of cash flows. Additionally, we adjust additions to plant and equipment to exclude NEOM Green Hydrogen Company (“NGHC”) expenditures funded by the joint venture's project financing, which is non-recourse to Air Products, as well as our partners’ equity contributions to arrive at a measure that we believe is more representative of our investment activities. Substantially all the funding we provide to NGHC is limited for use by the venture for its capital expenditures.
A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:
Fiscal Year Ended 30 September
Cash used for investing activities
Proceeds from sale of assets and investments
Purchases of short-term investments
Proceeds from short-term investments
Proceeds from other investing activities
NGHC expenditures not funded by Air Products' equity (A)
Capital expenditures
(A) Reflects the portion of "Additions to plant and equipment, including long-term deposits" that is associated with NGHC, less our approximate cash investment in the joint venture.
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LIQUIDITY AND CAPITAL RESOURCES
We believe we have sufficient cash, cash flows from operations, and access to funding sources to meet our liquidity needs. As further discussed in the "Cash Flows From Financing Activities" section on page 52 , we are able to raise capital through a variety of financing activities, including accessing capital or commercial paper markets or drawing upon our credit facilities.
As of 30 September 2025, we had $1.4 billion of foreign cash and cash items, compared to total cash and cash items of $1.9 billion. We do not expect a significant portion of the earnings from our foreign subsidiaries and affiliates to be subject to U.S. income tax upon repatriation. Depending on the country in which these entities operate, repatriation of earnings may be subject to foreign withholding and other taxes. However, we intend to indefinitely reinvest the majority of our foreign cash and cash items that would be subject to additional taxes outside the U.S.
Cash Flows From Operations
Fiscal Year Ended 30 September
Net income (loss) from continuing operations attributable to Air Products
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Tax reform repatriation
Business and asset actions
Gain on sale of business
Undistributed earnings of equity method investments
Gain on sale of assets and investments
Share-based compensation
Noncurrent lease receivables
Other adjustments
Changes in working capital accounts
Cash Provided by Operating Activities
In fiscal year 2025, cash provided by operating activities was $3.3 billion. Charges for business and asset actions totaled $3.7 billion, primarily driven by project exit costs as described in Note 5, Business and Asset Actions , to the consolidated financial statements. The adjustment for deferred income taxes of $554.8 was largely attributable to tax impacts associated with these costs.
Working capital accounts in fiscal year 2025 resulted in a net use of cash of $851.6, including $562.6 of other working capital driven by accrued income taxes. In fiscal year 2025, we made approximately $395 in tax payments related to the prior year sale of the LNG business. Payables and accrued liabilities were a use of cash of $224.0, primarily due to payments for contract terminations associated with our business and asset actions and previously accrued severance actions under our global cost reduction plan.
In fiscal year 2024, cash provided by operating activities totaled $3.6 billion. This included a $1.6 billion gain related to the sale of the LNG business as discussed in Note 4, Gain on Sale of Business , to the consolidated financial statements. Business and asset actions of $57.0 reflected expenses recognized for severance and other benefits associated with our global cost reduction plan. Refer to Note 5, Business and Asset Actions , to the consolidated financial statements for additional information. Other operating adjustments of $183.8 primarily included pension expense, net of contributions, totaling $89.1.
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Working capital changes in fiscal year 2024 resulted in a net use of cash of $183.0. A use of cash of $338.7 within payables and accrued liabilities primarily resulted from a reduction in customer advances for sale of equipment projects as revenue was recognized, along with payments related to previously accrued severance actions and incentive compensation under the fiscal year 2023 plan. An inventory-related cash use of $137.8 was largely attributable to helium purchases. A use of cash of $111.0 from trade receivables was primarily due to the timing of collections. Offsetting these uses, other working capital provided a source of cash of $370.1, largely driven by the timing of income tax payments related to the LNG business sale. As noted above, tax payments associated with the LNG sale were remitted in fiscal year 2025.
Cash Flows From Investing Activities
Fiscal Year Ended 30 September
Additions to plant and equipment, including long-term deposits
Acquisitions, less cash acquired
Investment in and advances to unconsolidated affiliates
Investment in financing receivables
Proceeds from sale of assets and investments
Purchases of short-term investments
Proceeds from short-term investments
Proceeds from other investing activities
Cash Used for Investing Activities
In fiscal year 2025, cash used for investing activities was $7.2 billion. The primary use of cash was $7.0 billion for additions to plant and equipment, including long-term deposits, of which approximately $3 billion related to the NEOM Green Hydrogen Project. Additional uses included investments in and advances to unconsolidated affiliates of $390.4, investments in financing receivables of $61.9, and cash paid for acquisitions, net of cash acquired, of $59.9. These activities are further detailed in the "Capital Expenditures" section on page 51 .
Cash proceeds of $245.8 from sales of assets and investments primarily included $104.3 from the sale of a subsidiary in Singapore and $37.7 for the sale of a regional office in Hersham, England, as further described in Note 6, Acquisitions and Divestitures , to the consolidated financial statements. Maturities of short-term investments provided cash of $122.5, which exceeded purchases of $117.6.
In fiscal year 2024, cash used for investing activities was $4.9 billion. The primary use of cash was $6.8 billion for additions to plant and equipment, including long-term deposits, and investments in financing receivables of $403.0. Additional information regarding the investments in financing receivables is provided in the "Capital Expenditures" section on page 51 . Proceeds from the sale of assets and investments totaled $1.9 billion and primarily related to the sale of the LNG business in September 2024. Refer to Note 4, Gain on Sale of Business , to the consolidated financial statements for additional information. Maturities of short-term investments provided cash of $470.7, which exceeded purchases of $141.4.
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Capital Expenditures (Non-GAAP Financial Measure)
The components of our capital expenditures are detailed in the table below. Refer to page 48 for a definition of this non-GAAP financial measure as well as a reconciliation to cash used for investing activities.
Fiscal Year Ended 30 September
Additions to plant and equipment, including long-term deposits
Acquisitions, less cash acquired
Investment in and advances to unconsolidated affiliates
Investment in financing receivables
NGHC expenditures not funded by Air Products' equity (A)
Capital Expenditures
(A) Reflects the portion of "Additions to plant and equipment, including long-term deposits" that is associated with NGHC, less our approximate cash investment in the joint venture.
Capital expenditures totaled $5.1 billion in fiscal year 2025, a 2% decrease from capital expenditures of $5.2 billion in fiscal year 2024. Spending in fiscal year 2025 was driven by $7.0 billion in additions to plant and equipment, primarily supporting our clean energy initiatives, including the NEOM Green Hydrogen Project in NEOM City, Saudi Arabia, and clean energy complexes in Louisiana, United States, and Alberta, Canada. We also continued to invest in our core industrial gases business, funding the development of new plants and the maintenance and replacement of existing facilities.
The $390.4 investment in and advances to unconsolidated affiliates in fiscal year 2025 included approximately $238 related to BHIG and approximately $115 for our final investment in the JIGPC joint venture. Additional information regarding these affiliates is provided in Note 6, Acquisitions and Divestitures , and Note 10, Equity Affiliates , to the consolidated financial statements. The $61.9 investment in financing receivables related to the financing arrangement for the natural gas-to-syngas processing facility in Uzbekistan. Additional details regarding this arrangement are provided in Note 6, Acquisitions and Divestitures , to the consolidated financial statements. In the prior year, the $403.0 investment in financing receivables included approximately $120 associated with the Uzbekistan arrangement, with the remaining amount related to the purchase of renewable fuel assets from World Energy. As discussed in Note 3, Variable Interest Entities , to the consolidated financial statements, we exited the World Energy sustainable aviation fuel project in fiscal year 2025. Cash paid for acquisitions, net of cash acquired, totaled $59.9 in fiscal year 2025 and was paid at the closing of our acquisition of an independent industrial gases company in Belgium.
Outlook for Investing Activities
It is not possible, without unreasonable efforts, to reconcile our forecasted capital expenditures to future cash used for investing activities because management is unable to identify the timing or occurrence of our future investment activity, which is driven by our assessment of competing opportunities at the time we enter into transactions. These decisions, either individually or in the aggregate, could have a significant effect on our cash used for investing activities. Accordingly, management is unable to fully reconcile, without unreasonable efforts, our forecasted capital expenditures to future cash used for investing activities.
We expect capital expenditures for fiscal year 2026 to be approximately $4 billion, reflecting continued investment in our energy transition projects, traditional industrial gas projects, and maintenance within our core business. Approximately $1 billion is expected to be dedicated to traditional industrial gas projects. We anticipate funding these expenditures through our existing cash balance and cash generated from continuing operations. We also have access to capital and money market financing as well as other sources of funding as discussed in the "Financing and Capital Structure" section on page 52 .
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Cash Flows From Financing Activities
Fiscal Year Ended 30 September
Long-term debt proceeds
Payments on long-term debt
Net decrease in commercial paper and short-term borrowings
Dividends paid to shareholders
Proceeds from stock option exercises
Investments by noncontrolling interests
Distributions to noncontrolling interests
Other financing activities
Cash Provided by Financing Activities
In fiscal year 2025, cash provided by financing activities was $2.8 billion . The primary source of cash was long-term debt proceeds of $4.4 billion , which included $ 2.7 billion from Euro- and U.S. Dollar-denominated senior fixed-rate notes issued in February and June 2025. Net proceeds from the notes were used to repay commercial paper obligations, including those incurred prior to the closing of the February 2025 O ffering that were used to repay €300 million (approximately $311) aggregate principal amount outstanding of our 1.000% Euro-denominated senior fixed-rate notes at maturity, plus accrued interest, and for general corporate purposes. An additional $1.6 billion in long-term debt proceeds was provided through project financing available to the NGHC joint venture, as further discussed on page 53 . Separately, we received $594.6 in contributions from noncontrolling interests, primarily related to NGHC. These sources of cash were partially offset by dividend payments to shareholders of $1.6 billion.
In fiscal year 2024, cash provided by financing activities was $2.6 billion. The primary source of cash was long-term debt proceeds of $4.7 billion, which included $2.5 billion from green senior notes issued during the second quarter of fiscal year 2024 through U.S. Dollar-denominated fixed-rate offerings. In line with our Green Finance Framework, we allocated the net proceeds to finance or refinance, in whole or in part, projects expected to deliver environmental benefits, such as pollution prevention and control, renewable energy generation and procurement, and sustainable aviation fuel. Additionally, the NGHC joint venture borrowed approximately $2.0 billion from project financing in fiscal year 2024. These proceeds were partially offset by financing fees of approximately $112.0, which were reflected within "Other financing activities." W e also received $ 428.5 in contributions from noncontrolling interests.
Cash proceeds from financing activities in fiscal year 2024 were partially offset by dividend payments to shareholders of $1.6 billion, payments on long-term debt of $486.2, and net decreases in commercial paper and short-term borrowings of $289.9.
Financing and Capital Structure
Debt
Total debt increased to $17.7 billion as of 30 September 2025 from $14.2 billion as of 30 September 2024. We issued Euro- and U.S. Dollar-denominated senior fixed-rate notes in February and June 2025, which together had a combined carrying value of $2.9 billion as of 30 September 2025. Total debt also increased due to approximately $1.6 billion in incremental borrowings under the project financing arrangement related to the NEOM Green Hydrogen Project, which is nonrecourse to Air Products, as further discussed on page 53 . Total debt included related party debt of $236.5 and $304.4 as of 30 September 2025 and 2024, respectively.
Subsequent to the balance sheet date, we repaid at maturity $550.0 aggregate principal amount of our 1.50% senior notes due October 2025, plus accumulated and unpaid interest through the maturity date.
Various debt agreements to which we are a party include financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. As of 30 September 2025, we were in compliance with all the financial and other covenants under our debt agreements.
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Committed Credit Facilities
During the second quarter of fiscal year 2025, we refinanced our existing 364-day $500 revolving credit agreement to extend its maturity date from 27 March 2025 to 26 March 2026 (the “364-Day Credit Agreement”). All other terms remain consistent with the original 364-Day Credit Agreement, including our ability to convert the facility into a term loan maturing 26 March 2027. Fees incurred in connection with the refinancing were not material.
We also maintain a five-year $3.0 billion revolving credit agreement that matures on 31 March 2029 (the “Five-Year Credit Agreement”). Both the 364-Day Credit Agreement and the Five-Year Credit Agreement are syndicated committed facilities that provide a source of liquidity and support our commercial paper program through the availability of senior unsecured debt to us and certain of our subsidiaries. No borrowings were outstanding under either of the 364-Day Credit Agreement or the Five-Year Credit Agreement as of 30 September 2025 or 30 September 2024.
Separately, certain of our foreign subsidiaries maintain access to committed credit facilities with a combined maximum borrowing capacity of $394.0, all of which was borrowed and outstanding as of 30 September 2025. The amount borrowed from available facilities as of 30 September 2024 was $1.1 billion, which included long-term borrowings of approximately $675 that were derecognized upon deconsolidation of BHIG during the second quarter of fiscal year 2025. Refer to Note 6, Acquisitions and Divestitures , to the consolidated financial statements for additional information.
NEOM Green Hydrogen Project Financing
To support the NEOM Green Hydrogen Project, NGHC has access to project financing of approximately $6.1 billion, which is expected to fund about 73% of the project and is being drawn over the construction period, as well as additional credit facilities totaling approximately $500 primarily for NGHC's working capital needs. Creditors of NGHC do not have recourse to the general credit of Air Products. As of 30 September 2025, the joint venture had borrowed short- and long-term principal amounts totaling $4.9 billion compared to $3.3 billion as of 30 September 2024. Refer to Note 3, Variable Interest Entities , to the consolidated financial statements for additional information.
Dividends
We believe that providing a consistent dividend plays a critical role in creating shareholder value. The Board of Directors determines whether to declare cash dividends on our common stock, as well as the timing and amount, based on our financial condition and other factors it deems relevant. We returned approximately $1.6 billion to shareholders in fiscal year 2025, an increase of 1% compared to the prior year, and we remain committed to continuing our history of dividend growth as part of our long-term capital allocation strategy.
Dividends are paid quarterly, usually during the sixth week after the close of the fiscal quarter. On 18 July 2025, the Board of Directors declared a quarterly dividend of $1.79 per share that was payable on 10 November 2025 to shareholders of record at the close of business on 1 October 2025. Additionally, on 19 November 2025, the Board of Directors declared a quarterly dividend of $1.79 per share that is payable on 9 February 2026 to shareholders of record at the close of business on 2 January 2026.
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PENSION BENEFITS
We and certain of our subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of our worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005, after which defined contribution plans were offered to new employees. The shift to defined contribution plans is expected to continue to reduce volatility of both plan expense and contributions. For additional information, refer to Note 18, Retirement Benefits , to the consolidated financial statements.
Net Periodic Cost
The table below summarizes the components of net periodic cost for our U.S. and international defined benefit pension plans for the fiscal years ended 30 September:
Service cost
Non-service related costs
Other
Net Periodic Cost
Net periodic cost was $66.0 and $123.8 in fiscal years 2025 and 2024, respectively. The decrease in costs versus the prior year was primarily attributable to non-service costs, which were driven by a higher expected return on plan assets due to a higher beginning balance of plan assets, lower interest cost, and a decrease in actuarial loss amortization. The net impact of non-service related items are reflected within "Other non-operating income (expense), net" on our consolidated income statements.
Service costs result from benefits earned by active employees and are reflected as operating expenses primarily within "Cost of sales" and "Selling and administrative expense" on our consolidated income statements. The amount of service costs capitalized in fiscal years 2025 and 2024 was not material.
The table below summarizes the assumptions used in the calculation of net periodic cost for the fiscal years ended 30 September:
Weighted average discount rate – Service cost
Weighted average discount rate – Interest cost
Weighted average expected rate of return on plan assets
Weighted average expected rate of compensation increase
2026 Outlook
In fiscal year 2026, we expect to recognize pension expense of approximately $30 to $40, which includes approximately $10 to $20 of non-service related costs. The lower non-service related costs are the result of higher expected return on plan assets from increases in the return assumption and a decrease in actuarial loss amortization.
In fiscal year 2025, we recognized net actuarial losses of $39.4 in other comprehensive income. Actuarial gains and losses are amortized into pension expense over prospective periods to the extent they are not offset by future gains or losses. Future changes in the discount rate and actual returns on plan assets could impact the actuarial gain or loss and resulting amortization in years beyond fiscal year 2026.
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Pension Funding
Funded Status
The projected benefit obligation represents the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The plan funded status is calculated as the difference between the projected benefit obligation and the fair value of plan assets at the end of the period.
The table below summarizes the projected benefit obligation, the fair value of plan assets, and the funded status for our U.S. and international plans as of 30 September:
Projected benefit obligation
Fair value of plan assets at end of year
Plan Funded Status
The net unfunded liability of $67.7 as of 30 September 2025 increased $23.4 from $44.3 as of 30 September 2024, as the interest cost component of the net periodic pension cost was greater than decreases to the projected benefit obligation from actuarial gains due to higher discount rates.
Company Contributions
Pension funding includes both contributions to funded plans and benefit payments for unfunded plans, which are primarily non-qualified plans. With respect to funded plans, our funding policy is that contributions, combined with appreciation and earnings, will be sufficient to pay benefits without creating unnecessary surpluses.
In addition, we make contributions to satisfy all legal funding requirements while managing our capacity to benefit from tax deductions attributable to plan contributions. With the assistance of third-party actuaries, we analyze the liabilities and demographics of each plan, which help guide the level of contributions. During fiscal years 2025 and 2024, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were $29.9 and $34.7, respectively.
For fiscal year 2026, cash contributions to defined benefit plans are estimated to be $25 to $35. The estimate is based on expected contributions to certain international plans and anticipated benefit payments for unfunded plans, which are dependent upon the timing of retirements. Actual future contributions will depend on future funding legislation, discount rates, investment performance, plan design, and various other factors.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to Note 1, Basis of Presentation and Major Accounting Policies , and Note 2, New Accounting Guidance , to the consolidated financial statements for a description of our major accounting policies and information concerning implementation and impact of new accounting guidance.
The accounting policies discussed below are those policies that we consider to be the most critical to understanding our financial statements because they require management's most difficult, subjective, or complex judgments, often as the result of the need to make estimates about the effects of matters that are inherently uncertain. These estimates reflect our best judgment about current and/or future economic and market conditions and their effect based on information available as of the date of our consolidated financial statements. If conditions change, actual results may differ materially from these estimates. Our management has reviewed these critical accounting policies and estimates and related disclosures with the Audit and Finance Committee of our Board of Directors.
Depreciable Lives of Plant and Equipment
Plant and equipment, net as of 30 September 2025 totaled approximately $25.3 billion, and depreciation expense totaled approximately $1.5 billion during fiscal year 2025. Disclosures related to plant and equipment are included in Note 11, Plant and Equipment, net , to the consolidated financial statements.
Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its estimated economic useful life. Economic useful life is the duration of time an asset is expected to be productively employed by us, which may be less than its physical life. Assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, market demand, competitive position, raw material availability, and geographic location.
The estimated economic useful life of an asset is monitored to determine its appropriateness, especially when business circumstances change. For example, changes in technology, changes in the estimated future demand for products, excessive wear and tear, or unanticipated government actions may result in a shorter estimated useful life than originally anticipated. In these cases, we would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.
Our regional industrial gas segments have numerous long-term customer supply contracts for which we construct an on-site plant on or near the customer’s facility. These contracts typically have initial contract terms of 10 to 20 years. Depreciable lives of the production assets related to long-term supply contracts are generally matched to the contract lives. Extensions to the contract term of supply frequently occur prior to the expiration of the initial term. As contract terms are extended, the depreciable life of the associated production assets is adjusted to match the new contract term, as long as it does not exceed the remaining physical life of the asset.
Our regional industrial gas segments also have contracts for liquid or gaseous bulk supply and, for smaller customers, packaged gases. The depreciable lives of production facilities associated with these contracts are generally 15 years. These depreciable lives have been determined based on historical experience combined with judgment on future assumptions such as technological advances, potential obsolescence, and competitors’ actions.
In addition, we may purchase assets through transactions accounted for as either an asset acquisition or a business combination. Depreciable lives are assigned to acquired assets based on the age and condition of the assets, the remaining duration of long-term supply contracts served by the assets, and our historical experience with similar assets. Management monitors its assumptions and may potentially need to adjust depreciable life as circumstances change.
We continue to depreciate assets that are temporarily idle. Depreciation is discontinued when assets meet the criteria for classification as held for sale.
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Impairment of Assets
As part of a project review initiated by our Board of Directors and Chief Executive Officer in fiscal year 2025, we made the decision to exit various projects, primarily related to clean energy generation and distribution. As a result, we assessed the carrying values of the affected project assets against their estimated fair values. Where carrying values exceeded fair values, we recorded impairment charges as described under “ Impairment of Assets: Plant and Equipment ”. The review also led to the recognition of an other-than-temporary impairment in one of our joint ventures, as discussed under " Impairment of Assets: Equity Method Investments ".
No triggering events were identified in fiscal year 2025 that would require impairment testing for any of our reporting units containing goodwill or indefinite-lived intangible assets. We completed our annual impairment tests for these assets and concluded there were no indications of impairment. Refer to “ Impairment of Assets: Goodwill ” and “ Impairment of Assets: Intangible Assets ” for additional detail.
Impairment of Assets: Plant and Equipment
Plant and equipment meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell. Plant and equipment to be disposed of other than by sale may be reviewed for impairment upon the occurrence of certain triggering events, such as decisions to discontinue or exit projects, unexpected contract terminations, or unforeseen foreign government-imposed restrictions or expropriations. Plant and equipment held for use is grouped for impairment testing at the lowest level for which there is identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances may include:
• a significant decrease in the market value of a long-lived asset grouping;
• a significant adverse change in the manner in which the asset grouping is being used or in its physical condition;
• an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the long-lived asset;
• a reduction in revenues that is other than temporary;
• a history of operating or cash flow losses associated with the use of the asset grouping; or
• changes in the expected useful life of the long-lived assets.
If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the asset group is compared to the carrying value to determine whether impairment exists. If an asset group is determined to be impaired, the loss is measured based on the difference between the asset group’s fair value and its carrying value. An estimate of the asset group’s fair value is based on the discounted value of its estimated cash flows.
The assumptions underlying the undiscounted future cash flow projections require significant management judgment. Factors that management must estimate include but are not limited to industry and market conditions, sales volume and prices, costs to produce, and inflation. The assumptions underlying the cash flow projections represent management’s best estimates at the time of the impairment review and could include probability weighting of cash flow projections associated with multiple potential future scenarios. Changes in key assumptions or actual conditions that differ from estimates could result in an impairment charge. We use reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.
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As part of a project review initiated by our Board of Directors and Chief Executive Officer in fiscal year 2025, we made the decision to exit various projects, primarily related to clean energy generation and distribution. Accordingly, we assessed the recoverability of project assets and recorded a total impairment charge of approximately $2.5 billion in fiscal year 2025 to write down long-lived assets to their estimated value, depending on the intended manner of disposal. For assets that met the held-for-sale criteria and are actively being marketed, observable market prices were not available. As a result, fair value less cost to sell was estimated using various data points, including an offer to purchase the facility, amounts due from the customer if the customer was contractually required to repurchase the asset, and an internally-developed discounted cash flow analysis. An impairment loss of $350.6 was recognized to reduce the long-lived assets held for sale to their estimated fair value, net of estimated selling costs, of $418.3 as of 30 September 2025. We expect the sale of these assets to be completed during fiscal year 2026. For plant and equipment that did not meet the held-for-sale criteria but is capable of being sold through secondary equipment markets, recoverability was evaluated using an orderly liquidation valuation approach. An impairment of approximately $2.1 billion was recognized as the difference between the estimated value of $22.5 and the net book value of the assets as of 31 March 2025. There have been no significant changes in the estimated net realizable value for the remaining assets as of 30 September 2025.
These estimates are considered critical because they involve significant assumptions regarding future cash flows, asset disposition strategies, and market conditions, all of which are subject to change and could materially affect the amount and timing of impairment charges. Additionally, because the project review is ongoing, we may make further project-related decisions that could impact the intended use or recoverability of certain assets, potentially resulting in the recognition of additional impairment charges in future periods.
Other than the impairment charges recorded as discussed above, no additional asset groupings required impairment testing, as no other events or changes in circumstances indicated that their carrying amounts may not be recoverable.
Impairment of Assets: Goodwill
The acquisition method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price, plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree, over the fair value of identifiable net assets of an acquired entity. Goodwill, net was $963.9 as of 30 September 2025. Disclosures related to goodwill are included in Note 12, Goodwill , to the consolidated financial statements.
We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable. The tests are done at the reporting unit level, which is defined as being equal to or one level below the operating segment for which discrete financial information is available and whose operating results are reviewed by segment managers regularly. At the time of our fiscal year 2025 testing, we had five reportable business segments, six operating segments and 10 reporting units, eight of which included a goodwill balance. Reporting units are primarily based on products and subregions within each reportable segment. The majority of our goodwill is assigned to reporting units within our regional industrial gases segments. Refer to Note 26, Business Segment and Geographic Information , for additional information.
As part of annual goodwill impairment testing, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Our evaluation of qualitative factors includes an assessment of relevant facts, events, and circumstances of a reporting unit including but not limited to: business performance, strategy, and outlook; macroeconomic conditions; local market dynamics; cost management; and significant changes in key personnel, customers, operating assets, or product mix. We perform a quantitative test when qualitative factors alone are not sufficient to conclude whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If we perform a quantitative test, an impairment loss will only be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
In the fourth quarter of fiscal year 2025, we conducted our annual assessment and concluded that it was more likely than not that the fair value of each reporting unit was greater than its carrying value.
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Impairment of Assets: Intangible Assets
Disclosures related to intangible assets other than goodwill are included in Note 13, Intangible Assets , to the consolidated financial statements.
Intangible assets, net with determinable lives as of 30 September 2025 totaled $258.4 and consisted primarily of customer relationships. Finite-lived intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. See the impairment discussion above under " Impairment of Assets – Plant and Equipment " for a description of how impairment losses are determined.
Indefinite-lived intangible assets as of 30 September 2025 totaled $35.1 and consisted of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. As part of annual indefinite-lived intangible asset impairment testing, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of the intangible asset is less than its carrying value. Our evaluation of qualitative factors includes an assessment of relevant facts, events, and circumstances including but not limited to: business performance, strategy and outlook; macroeconomic conditions; local market dynamics; cost management; and significant changes in key personnel, customers, operating assets, or product mix. We perform a quantitative test when qualitative factors alone are not sufficient to conclude whether it is more likely than not that the fair value of the intangible asset is less than its carrying value. If we perform a quantitative test, an impairment loss will only be recognized for the amount by which the carrying value of the indefinite-lived intangible asset exceeds its fair value, not to exceed the total carrying value of the asset.
In the fourth quarter of fiscal year 2025, we conducted our annual assessment and concluded that it was more likely than not that the fair value of each asset was greater than its carrying value.
Impairment of Assets: Equity Method Investments
Investments in and advances to equity affiliates totaled approximately $5.4 billion as of 30 September 2025. The majority of our equity method investments are ventures with other industrial gas companies. Summarized financial information of our equity affiliates is included in Note 10, Equity Affiliates , to the consolidated financial statements.
We review our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recognized in the event that an other-than-temporary decline in fair value below the carrying value of an investment occurs. We estimate the fair value of our investments under the income approach, which considers the estimated discounted future cash flows expected to be generated by the investee, and/or the market approach, which considers market multiples of revenue and earnings derived from comparable publicly-traded industrial gas companies. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.
In fiscal year 2025, we determined there was an other-than-temporary impairment of a joint venture in China that had been established to develop clean hydrogen infrastructure in the region. As a result, we recorded a charge of $6.8 to write down the full carrying value of the investment. There were no other events or changes in circumstances that indicated the carrying amount of our equity method investments may not be recoverable, and therefore, no further impairment testing was required.
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Revenue Recognition: Cost Incurred Input Method
Revenue from sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. We use a cost incurred input method to recognize revenue by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer.
Accounting for contracts using the cost incurred input method requires management judgment relative to assessing risks and their impact on the estimates of revenues and costs. Our estimates are impacted by factors such as the potential for incentives or penalties on performance, schedule delays, technical issues, cost inflation, labor productivity, the complexity of work performed, the availability of materials, and performance of subcontractors. When adjustments in estimated total contract revenues or estimated total costs are required, any changes in the estimated profit from prior estimates are recognized in the current period for the inception-to-date effect of such change. When estimates of total costs to be incurred on a contract exceed estimates of total revenues to be earned, a provision for the entire estimated loss on the contract is recorded in the period in which the loss is determined.
In addition to the typical risks associated with underlying performance of engineering, project procurement, and construction activities, our sale of equipment projects within our Corporate and other segment require monitoring of risks associated with schedule, geography, and other aspects of the contract and their effects on our estimates of total revenues and total costs to complete the contract.
We assess the performance of our sale of equipment projects as they progress. Our earnings could be positively or negatively impacted by changes to our contractual revenues and cost forecasts on these projects. Changes to project revenue and cost estimates unfavorably impacted operating results by approximately $85 in fiscal year 2025.
Revenue Recognition: On-site Customer Contracts
For customers who require large volumes of gases on a long-term basis, we produce and supply gases under long-term contracts from large facilities that we build, own, and operate on or near the customer’s facilities. Certain of these on-site contracts contain complex terms and provisions regarding tolling arrangements, minimum payment requirements, variable components, pricing provisions, and amendments, which require significant judgment to determine the amount and timing of revenue recognition.
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Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax basis of assets and liabilities measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As of 30 September 2025, accrued income taxes were $179.4, and our net deferred income tax liability was $451.7. Tax liabilities related to uncertain tax positions as of 30 September 2025 were $194.8, excluding interest and penalties. Income tax benefit for the fiscal year ended 30 September 2025 was $94.3.
Management judgment is required concerning the ultimate outcome of tax contingencies and the realization of deferred tax assets.
Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our recorded tax liabilities adequately provide for these assessments.
Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when we do not expect sufficient sources of future taxable income to realize the benefit of the operating losses or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in income tax expense.
A 1% increase or decrease in our effective tax rate may result in a decrease or increase to net income, respectively, of approximately $4.
Disclosures related to income taxes are included in Note 24, Income Taxes , to the consolidated financial statements.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements for pension and other postretirement benefits are determined on an actuarial basis utilizing numerous assumptions. The discussion that follows provides information on the significant assumptions, expense, and obligations associated with the defined benefit plans.
Actuarial models are used in calculating the expense and liability related to the various defined benefit plans. These models have an underlying assumption that the employees render service over their service lives on a relatively consistent basis; therefore, the expense of benefits earned should follow a similar pattern.
Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. We determine assumptions about the discount rate, the expected rate of return on plan assets, and the rate of compensation increase. Note 18, Retirement Benefits , to the consolidated financial statements includes disclosure of these rates on a weighted-average basis for both the U.S. and international plans. The actuarial models also use assumptions about demographic factors such as retirement age, mortality, and turnover rates. Mortality rates are based on the most recent U.S. and international mortality tables. We believe the actuarial assumptions are reasonable. However, actual results could vary materially from these actuarial assumptions due to economic events and differences in rates of retirement, mortality, and turnover.
One of the assumptions used in the actuarial models is the discount rate used to measure benefit obligations. This rate reflects the prevailing market rate for high-quality, fixed-income debt instruments with maturities corresponding to the expected timing of benefit payments as of the annual measurement date for each of the various plans. We measure the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows. The rates along the yield curve are used to discount the future cash flows of benefit obligations back to the measurement date. These rates change from year to year based on market conditions that affect corporate bond yields. A higher discount rate decreases the present value of the benefit obligations and results in lower pension expense. With respect to impacts on pension benefit obligations, a 50 bp increase or decrease in the discount rate may result in a decrease or increase, respectively, to pension expense of approximately $14 per year.
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The expected rate of return on plan assets represents an estimate of the long-term average rate of return to be earned by plan assets reflecting current asset allocations. In determining estimated asset class returns, we take into account historical and future expected long-term returns and the value of active management, as well as the interest rate environment. Asset allocation is determined based on long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Lower returns on the plan assets result in higher pension expense. A 50 bp increase or decrease in the estimated rate of return on plan assets may result in a decrease or increase, respectively, to pension expense of approximately $18 per year.
We use a market-related valuation method for recognizing certain investment gains or losses for our significant pension plans. Investment gains or losses are the difference between the expected return and actual return on plan assets. The expected return on plan assets is determined based on a market-related value of plan assets. This is a calculated value that recognizes investment gains and losses on equities over a five-year period from the year in which they occur and reduces year-to-year volatility. The market-related value for non-equity investments equals the actual fair value. Expense in future periods will be impacted as gains or losses are recognized in the market-related value of assets.
The expected rate of compensation increase is another key assumption. We determine this rate based on review of the underlying long-term salary increase trend characteristic of labor markets and historical experience, as well as comparison to peer companies. A 50 bp increase or decrease in the expected rate of compensation may result in an increase or decrease to pension expense, respectively, of approximately $4 per year.
Loss Contingencies
In the normal course of business, we encounter contingencies, or situations involving varying degrees of uncertainty as to the outcome and effect on our company. We accrue a liability for loss contingencies when it is considered probable that a liability has been incurred and the amount of loss can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued.
Contingencies include those associated with litigation and environmental matters, for which our accounting policy is discussed in Note 1, Basis of Presentation and Major Accounting Policies , to the consolidated financial statements, and details are provided in Note 19, Commitments and Contingencies , to the consolidated financial statements. Significant judgment is required to determine both the probability and whether the amount of loss associated with a contingency can be reasonably estimated. These determinations are made based on the best available information at the time. As additional information becomes available, we reassess probability and estimates of loss contingencies. Revisions to the estimates associated with loss contingencies could have a significant impact on our results of operations in the period in which an accrual for loss contingencies is recorded or adjusted. For example, due to the inherent uncertainties related to environmental exposures, a significant increase to environmental liabilities could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or our proportionate share of the liability increases. Similarly, a future charge for regulatory fines or awards associated with could have a significant impact on our net income in the period in which it is recorded.
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